Fx flash rba end of easing cycle 20 sept 2016

FX Flash

Group Economics

Macro & Financial Markets 50 Research 40 30 20 20 September 2016 10 0 -10 -20 -30  Jan-10 RBA minutes: looking at the bright Jan-11 Jan-12 Jan-13side…

Jan-14 Jan-15 Jan-16

RBA: end of easing cycle?

Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com

 …more tolerance for below target inflation in the Change in full time jobs '000 3mth avg short (rhs) term…  …end of easing cycle?in labor force '000 3mth avg (lhs) Change  2016 year end AUD/USD forecast: 0.74

RBA minutes: looking at the bright side…

The minutes of the RBA monetary policy meeting on 6 September was released earlier today. It was relatively optimistic. The RBA noted that though investment intentions from the capital expenditure survey implied a further large decline in mining investment in 2016/17, it is in line with earlier expectations. With regards to the labour market, despite liaison contacts reporting that employers are taking a more cautious approach to hiring, the RBA noted that forward looking indicators were consistent with little change in the unemployment rate in the coming months. Hence the current stance of monetary policy was consistent with sustainable growth in the Australian economy and achieving the inflation target over time. …more tolerance for below target inflation in the short term…

On 19 September, the Statement on the Conduct of Monetary Policy which outlines the relationship between the RBA and the Government and objectives of monetary policy was released. A flexible medium term inflation target of between two to three percent was agreed. This allows for natural short run variation in inflation over the economic cycle. This is no different from the previous agreement in 2013. However the new agreement included “the medium term focus provides the flexibility for the RBA to set its policy so as best to achieve its broad objectives, including financial stability” potentially could imply the RBA has greater tolerance to weaker than target inflation outcomes in the short term. …end of easing cycle?

Financial markets are pricing in only a quarter chance that the RBA will ease monetary policy this year. Our conviction that the RBA is likely to cut the Official Cash Rate by 25bp later this year has also declined. However the arguments for more monetary stimulus remain. The RBA has acknowledged that the strong economic performance in the second quarter of this year was due to noticeable contribution from public demand. Given Australia’s fiscal constraint, we do not expect

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FX Flash - RBA: end of easing cycle? - 20 September 2016

this driver to persist. It is also worth noting that while there are diminishing returns to lower monetary policy, the net effect remains a positive. This is because the average borrower household has two to three times more net interest bearing debt than in net interest earning assets. On the housing market, the RBA has noted that growth in housing prices had declined at the national level over the past year and that rental vacancy rate had drifted higher. Despite auction clearance rates increasing lately, the number of auctions had declined and remained lower than a year earlier. Housing credit growth has also moderated. We expect inflation in the third quarter (26 October) to remain below the target range of two to three percent as domestic cost pressures including wage growth are expected to remain low for some time. RBA governor Philip Lowe will be speaking on 22 September.

2016 year end AUD/USD forecast: 0.74 On the exchange rate, the Australian dollar is still likely to be lower than higher from current levels in the coming months as financial markets are only pricing in less than 60% probability that the Fed will raise interest rates later this year in December. Our year end AUD/USD forecast is 0.74.

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FX Flash - RBA: end of easing cycle? - 20 September 2016